UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-QSB
-----------------------------------
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2005
Commission File Number: 0-21475
EMERGENT GROUP INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 93-1215401
- ---------------------------------------- -------------------------------------
(State of jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
932 Grand Central Ave.
Glendale, CA 91201
---------------------
(Address of principal executive offices)
(818) 240-8250
--------------
(Registrant's telephone number)
Not Applicable
--------------
(Former name, address and fiscal year, if changed since last report)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
As of May 13, 2005, the registrant had a total of 4,745,530 shares of
Common Stock outstanding.
================================================================================
EMERGENT GROUP INC.
FORM 10-QSB Quarterly Report
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 2005 (unaudited) 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 (unaudited) 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 14
Item 4. Submissions of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
March 31,
2005
----------------
ASSETS (Unaudited)
Current assets
Cash $ 493,810
Accounts receivable, net of allowance for doubtful
accounts of $24,119 1,520,297
Inventory, net of reserves of $135,878 387,482
Prepaid expenses 159,631
----------------
Total current assets 2,561,220
Property and equipment, net of accumulated depreciation and
amortization of $3,229,718 1,653,024
Goodwill 779,127
Deposits and other assets 146,995
----------------
Total assets $ 5,140,366
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ 650,000
Current portion of capital lease obligations 324,475
Current portion of notes payable 342,463
Accounts payable 619,536
Accrued expenses 677,028
----------------
Total current liabilities 2,613,502
Capital lease obligations, net of current portion 296,981
Notes payable, net of current portion 241,833
----------------
Total liabilities 3,152,316
Minority Interest 169,798
Shareholders' equity
Preferred stock, $0.001 par value, non-voting 10,000,000
shares authorized, no shares issued and outstanding -
Common stock, $0.04 par value, 100,000,000 shares authorized
4,744,551 shares issued and outstanding 189,782
Additional paid-in capital 14,488,090
Accumulated deficit (12,859,620)
----------------
Total shareholders' equity 1,818,252
----------------
Total liabilities and shareholders' equity $ 5,140,366
================
The accompanying notes are an integral part of these condensed financial statements.
3
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2005 2004
-------------- ----------------
Revenue $ 2,922,523 $ 2,682,440
Cost of goods sold 1,968,948 1,906,605
-------------- ---------------
Gross profit 953,575 775,835
Selling, general, and administrative expenses 799,134 799,974
-------------- ---------------
Income (loss) from operations 154,441 (24,139)
Other income (expense)
Interest expense (34,382) (30,644)
Gain (loss) on disposal of property and equipment 9,401 (3,518)
Other income, net 5,980 5,480
-------------- ---------------
Total other income (expense) (19,001) (28,682)
-------------- ---------------
Income (loss) before provision for income taxes
and minority interest 135,440 (52,821)
Provision for income taxes - -
-------------- ---------------
Income (loss) before minority interest 135,440 (52,821)
Minority interest in income of consolidated
limited liability companies 30,162 (29,729)
-------------- ---------------
Net income (loss) $ 105,278 $ (82,550)
============== ===============
Basic and diluted earnings (loss) per share $ 0.02 $ (0.02)
============== ===============
Basic and diluted weighted-average shares outstanding 4,744,551 4,744,551
============== ===============
The accompanying notes are an integral part of these condensed financial statements.
4
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
--------------------------------
2005 2004
--------------- ----------------
Cash flows from operating activities
Net income (loss) $ 105,278 $ (82,550)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
(Gain) loss on disposal of property and equipment (9,401) 3,518
Depreciation and amortization 299,854 296,874
Provision for doubtful accounts (2,006) (2,198)
Minority interest in income 30,162 29,729
(Increase) decrease in
Accounts receivable (89,136) 84,775
Inventory (14,738) 27,346
Prepaid expenses (30,663) 25,879
Deposits and other assets (14,146) (8,068)
Increase (decrease) in
Accounts payable 132,400 78,719
Accrued expenses (7,221) (134,059)
--------------- ----------------
Net cash provided by operating activities 400,383 319,965
--------------- ----------------
Cash flows from investing activities
Purchase of property and equipment (57,865) (192,281)
Cash paid to limited liability companies (42,291) (37,300)
Proceeds from the sale of property and equipment 11,539 1,481
--------------- ----------------
Net cash used in investing activities (88,617) (228,100)
--------------- ----------------
Cash flows from financing activities
Payments on capital lease obligations (73,371) (63,510)
Payments on notes payable (96,180) (97,644)
--------------- ----------------
Net cash used in financing activities (169,551) (161,154)
--------------- ----------------
Net increase (decrease) in cash 142,215 (69,289)
Cash, beginning of period 351,595 690,331
Cash, end of period $ 493,810 $ 621,042
Supplemental disclosures of cash flow information:
Interest paid $ 35,738 $ 37,316
Supplemental disclosures of non-cash investing and financing activities -
During the three months ended March 31, 2005 the Company financed property
and equipment of $78,000 through a financing lease.
The accompanying notes are an integral part of these condensed financial statements.
5
EMERGENT GROUP INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Emergent Group Inc. ("Emergent") is the parent company of PRI Medical
Technologies, Inc., its wholly owned and only operating subsidiary. PRI
Medical Technologies, Inc. primarily conducted its business through its
wholly owned subsidiary Physiologic Reps ("PRI") until March 2005 at which
time PRI was merged into PRI Medical Technologies, Inc. ("PRI Medical").
Emergent and PRI Medical are referred to collectively hereinafter as the
"Company." PRI Medical provides mobile laser/surgical services, along with
technical support, on a per procedure basis to hospitals, out-patient
surgery centers, and physicians' offices.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Emergent have been prepared pursuant to the rules of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. These
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2004. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the results for the periods presented.
The results of operations presented for the three months ended March 31,
2005 are not necessarily indicative of the results to be expected for any
other interim period or any future fiscal year.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Emergent and
its wholly owned subsidiaries. Also, in accordance with the Financial
Accounting Standards Board Interpretation Nos. 46 and 46R, "Consolidation
of Variable Interest Entities" the Company has accounted for its equity
investments in two limited liability companies under the full consolidation
method. All significant inter-company transactions and balances have been
eliminated through consolidation.
Use of Estimates
----------------
The preparation of the condensed consolidated financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of income (loss) and expenses during the reporting period. Actual
results could differ significantly from those estimates.
Inventory
---------
Inventory consists of finished goods primarily used in connection with the
delivery of our mobile surgical equipment rental and services business.
Inventory is stated at the lower of cost or market, on a first-in,
first-out basis.
Earnings Per Share
------------------
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." Under the provisions of SFAS No. 128, basic net
income (loss) per common share ("Basic EPS") is computed by dividing net
income per common share by the weighted average number of common shares
outstanding. Diluted net income per common share ("Diluted EPS") is
computed by dividing net income by the weighted average number of common
shares and dilutive common share equivalents then outstanding. SFAS No. 128
requires the presentation of both Basic EPS and Diluted EPS on the face of
the condensed consolidated statements of operations. There were no dilutive
common share equivalents outstanding as of March 31, 2005 and 2004.
6
Recent Accounting Pronouncements
---------------------------------
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS No.
151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) under the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5 of ARB No. 43,
Chapter 4, previously stated that ". . . under some circumstances, items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current
period charges. . . ." This Statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overhead to the costs of conversion be based
on the normal capacity of the production facilities. This statement is
effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. Management does not expect adoption of SFAS No. 151 to have
a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 152,"Accounting for Real Estate
Time-Sharing Transactions". The FASB issued this Statement as a result of
the guidance provided in AICPA Statement of Position (SOP) 04-2,"Accounting
for Real Estate Time-Sharing Transactions". SOP 04-2 applies to all real
estate time-sharing transactions. Among other items, the SOP provides
guidance on the recording of credit losses and the treatment of selling
costs, but does not change the revenue recognition guidance in SFAS No.
66,"Accounting for Sales of Real Estate", for real estate time-sharing
transactions. SFAS No. 152 amends Statement No. 66 to reference the
guidance provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67,
"Accounting for Costs and Initial Rental Operations of Real Estate
Projects", to state that SOP 04-2 provides the relevant guidance on
accounting for incidental operations and costs related to the sale of real
estate time-sharing transactions. SFAS No. 152 is effective for years
beginning after June 15, 2005, with restatements of previously issued
financial statements prohibited. This statement is not applicable to the
Company.
In December 2004, the FASB issued SFAS No. 153,"Exchanges of Nonmonetary
Assets," an amendment to Opinion No. 29,"Accounting for Nonmonetary
Transactions". Statement No. 153 eliminates certain differences in the
guidance in Opinion No. 29 as compared to the guidance contained in
standards issued by the International Accounting Standards Board. The
amendment to Opinion No. 29 eliminates the fair value exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. Such an exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary asset
exchanges occurring in periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in
periods beginning after December 16, 2004. Management does not expect
adoption of SFAS No. 153 to have a material impact on the Company's
financial statements.
In December 2004, the FASB issued SFAS No. 123(R),"Share-Based Payment".
SFAS 123(R) amends SFAS No. 123,"Accountung for Stock-Based Compensation",
and APB Opinion 25,"Accounting for Stock Issued to Employees." SFAS
No.123(R) requires that the cost of share-based payment transactions
(including those with employees and non-employees) be recognized in the
financial statements. SFAS No. 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or
offering to issue) its shares, share options, or other equity instruments
(except for those held by an ESOP) or by incurring liabilities (1) in
amounts based (even in part) on the price of the entity's shares or other
equity instruments, or (2) that require (or may require) settlement by the
issuance of an entity's shares or other equity instruments. This statement
is effective (1) for public companies qualifying as SEC small business
issuers, as of the first interim period or fiscal year beginning after
December 15, 2005, or (2) for all other public companies, as of the first
interim period or fiscal year beginning after June 15, 2005, or (3) for all
nonpublic entities, as of the first fiscal year beginning after December
15, 2005. Management is currently assessing the effect of SFAS No. 123(R)
on the Company's financial statements.
3. DEBT OBLIGATIONS
At March 31, 2005 we have a bank line of credit (the "Bank Line of Credit")
and a term loan (the "Term Loan") outstanding in the amount of $650,000 and
7
$149,775, respectively. The loan agreements, as amended, for both the Bank
Line of Credit and Term Loan provide for monthly interest payments at the
prime rate, plus 2.5%. The Bank Line of Credit, as amended, is not
available for additional borrowings. In addition, the principal balance and
accrued interest for both credit facilities is due and payable on May 31,
2005. The Bank Line of Credit and Term Loan are collateralized by accounts
receivable and a security interest on other unencumbered assets of the
Company. The Bank Term Loan and Bank Line of Credit agreements prohibit the
payment of cash dividends and require us to maintain certain levels of net
worth and to generate certain ratios of cash flows to debt service.
Notwithstanding the modified terms and conditions of these credit
facilities as discussed herein, as of March 31, 2005 we were not in
compliance with certain covenants and provisions of the original loan
agreements, however, the lender has provided waivers for such
non-compliance up to and including the maturity date of May 31, 2005. Both
the Bank Term Loan and Bank Line of Credit are classified as current
liabilities in the accompanying condensed consolidated balance sheet as of
March 31, 2005.
In 2002 we renegotiated substantially all of our outstanding debt and lease
obligations with our key creditors. The restructured debt and lease
agreements provided for, in some cases, the return of equipment used to
collateralize such obligations, and certain periodic and monthly
installment payments for the balance of such obligations. As of March 31,
2005 our outstanding restructured debt and lease obligations amounted to
$570,000. In the event of default by the Company all amounts then
outstanding are accelerated and become immediately due and payable. In
addition, in the event of default, certain restructured debt and lease
agreements provide for the payment of additional principal amounts of up to
$187,500, excluding collection costs. As of March 31, 2005 and the filing
of this Quarterly Report on Form 10-QSB we were in compliance with the
terms and conditions of our renegotiated debt and lease agreements.
The Company incurred interest expense of $34,382 and $30,644 for the three
months ended March 31, 2005 and 2004, respectively.
4. LEGAL MATTERS
Byong Y. Kwon, Plaintiff against Daniel J. Yun, Emergent Group Inc.,
Emergent Capital Investment Management, LLC, Metedeconk Holdings, LLC,
Voyager Advisors, LLC, Millennium Tradition Limited (f/k/a Millennium
Heritage, Limited), Emergent Management Company, LLC, Endurance Advisors,
Limited, SK Networks Co., Ltd. (f/k/a SK Global Co., Ltd.), Hye Min Kang,
John Does 1-2 and Richard Roes 1-2 (collectively the "Defendants").
Plaintiff's Complaint against the Defendants named above is a civil
lawsuit, which was signed by the clerk on February 2, 2005. This action is
brought in the United States District Court, Southern District of New York
by Plaintiff against the Company, a former director, Daniel Yun, and other
parties to recover money damages for alleged fraud, negligent
misrepresentations and aiding and abetting fraud. The 35-page Amended
Complaint alleges that the factual basis involving the action against the
Company involves alleged false representations to Plaintiff to induce him
to leave his then employment in 2001 and accept the Company's and another
named Defendant's alleged offer of employment. Plaintiff seeks compensatory
damages and punitive damages each in the amount of not less than $2,100,000
together with interest thereon, reasonable attorneys' fees and other
specific relief against Defendants other than the Company. Management
intends to deny the Plaintiff's allegations against the Company and to
vigorously defend this lawsuit.
5. RELATED PARTY TRANSACTIONS
Transactions with BJH Management
The Company's Chairman and Chief Executive Officer maintains his primary
office in New York. In this regard, the Company reimbursed BJH Management,
LLC, a company owned by the Company's Chairman and Chief Executive Officer,
for office rent and related expenses totaling $8,299 and $7,982 for the
three months ended March 31, 2005 and 2004, respectively.
8
6. ISSUANCE OF STOCK OPTIONS
During the quarter ended March 31, 2005 the Company issued to employees
stock options to purchase 73,000 shares of common stock under the 2002
Stock Option Plan. Such options have a 10-year term and are exercisable at
$0.40 per share. Generally, one-fifth of such options vest over five
consecutive years. The options were valued using the Black Schoels Model
assuming volatility of 150% and a risk free interest rate of 3.5%. The
total value of the options was determined to be $26,831. Generally,
one-fifth of such options vest over five consecutive years. The Company's
basic and dilutive net income per share for the quarter ended March 31,
2005 is follows:
Net income:
As reported $105,278
Pro Forma $103,936
Basic and Dilutive Net Income Per Share:
As reported $0.02
Pro Forma $0.02
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Forward-Looking Statements
The information contained in this Form 10-QSB and documents incorporated herein
by reference are intended to update the information contained in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2004 and such
information presumes that readers have access to, and will have read, the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Risk Factors" and other information contained in such Form 10-KSB
and other Company filings with the Securities and Exchange Commission ("SEC").
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, and actual results
could be significantly different than those discussed in this Form 10-QSB.
Certain statements contained in Management's Discussion and Analysis,
particularly in "Liquidity and Capital Resources," and elsewhere in this Form
10-QSB are forward-looking statements. These statements discuss, among other
things, expected growth, future revenues and future performance. Although we
believe the expectations expressed in such forward-looking statements are based
on reasonable assumptions within the bounds of our knowledge of our business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made by us
or on our behalf. The forward-looking statements are subject to risks and
uncertainties including, without limitation, the following: (a) changes in
levels of competition from current competitors and potential new competition,
(b) possible loss of significant customer(s), (c) the Company's ability to meet
the terms and conditions of its renegotiated debt and lease obligations, and (d)
changes in availability or terms of working capital financing from vendors and
lending institutions. The foregoing should not be construed as an exhaustive
list of all factors that could cause actual results to differ materially from
those expressed in forward-looking statements made by us. All forward-looking
statements included in this document are made as of the date hereof, based on
information available to the Company on the date thereof, and the Company
assumes no obligation to update any forward-looking statements.
Overview
Emergent Group Inc. ("Emergent") is the parent company of PRI Medical
Technologies, Inc., its wholly owned and only operating subsidiary. PRI Medical
Technologies, Inc. primarily conducted its business through its wholly owned
subsidiary Physiologic Reps ("PRI") until March 2005 at which time PRI was
merged into PRI Medical Technologies, Inc. ("PRI Medical"). Emergent and PRI
Medical are referred to collectively hereinafter as the "Company." PRI Medical
provides mobile laser/surgical services, along with technical support, on a per
procedure basis to hospitals, out-patient surgery centers, and physicians'
offices.
Critical Accounting Policies
Our discussion and analysis of our financial conditions and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements require managers to make estimates and
disclosures on the date of the financial statements. On an on-going basis, we
evaluate our estimates including, but not limited to, those related to revenue
recognition. We use authoritative pronouncements, historical experience and
other assumptions as the basis for making judgments. Actual results could differ
from those estimates. We believe that the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
financial statements.
Revenue Recognition. Revenue is recognized when the services are performed and
billable. We are required to make judgments based on historical experience and
future expectations, as to the realizability of goods and services billed to our
customers. These judgments are required to assess the propriety of the
recognition of revenue based on Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition," and related guidance. We make such assessments based on
the following factors: (a) customer-specific information, and (b) historical
experience for issues not yet identified.
Inventory Valuation. We are required to make judgments based on historical
experience and future expectations as to the realizability of our inventory. We
make these assessments based on the following factors: (a) existing orders and
usage, (b) age of the inventory, and (c) historical experience.
10
Property and Equipment. We are required to make judgments based on historical
experience and future expectations as to the realizability of our property and
equipment. We made these assessments based on the following factors: (a) the
estimated useful lives of such assets, (b) technological changes in our
industry, and (c) the changing needs of our customers.
Results of Operations
The following table sets forth certain selected unaudited condensed consolidated
statement of operations data for the periods indicated in dollars and as a
percentage of total revenues. The following discussion relates to our results of
operations for the periods noted and are not necessarily indicative of the
results expected for any other interim period or any future fiscal year. In
addition, we note that the period-to-period comparison may not be indicative of
future performance.
Three Months Ended
March 31,
--------------------------------------
2005 % 2004 %
--------------- ---------------
(unaudited)
Revenue $ 2,922,523 100% $ 2,682,440 100%
Cost of goods sold 1,968,948 67% 1,906,605 71%
--------------- ---------------
Gross profit 953,575 33% 775,835 29%
Selling, general, and administrative expenses 799,134 27% 799,974 30%
--------------- ---------------
Income (loss) from operations 154,441 5% (24,139) -1%
Other income (expense) (19,001) -1% (28,682) -1%
--------------- ---------------
Income (loss) before provision for income
taxes and minority interest 135,440 5% (52,821) -2%
Provision for income taxes - 0% - 0%
--------------- ---------------
Net income (loss) before minority interest 135,440 5% (52,821) -2%
Minority interest in income of consolidated
limited liability companies 30,162 1% (29,729) -1%
--------------- ---------------
Net income (loss) $ 105,278 4% $ (82,550) -3%
=============== ===============
Comparison of the Three Months Ended March 31, 2005 to March 31,2004
We generated revenues of $2,922,523 in 2005 compared to $2,682,440 in 2004. The
increase in revenues of $240,083 in 2005 compared to 2004 is primarily related
to an increase in revenues from our surgical procedures. In addition, price
increases implemented in late 2004 and early 2005 for various surgical and
cosmetic procedures also contributed to the increase in revenues in 2005. Total
revenues from surgical and cosmetic services represented approximately 87% and
12%, respectively, of total revenues for both 2005 and 2004.
Cost of goods sold was $1,968,948 or 67% of revenues in 2005 compared to
$1,906,605 or 71% of revenues in 2004. Cost of goods sold include payroll and
related expenses for technicians, cost of disposables used in providing surgical
and cosmetic services, depreciation and amortization, and other expenses
primarily related to delivery of our mobile surgical equipment rental and
technician services. The overall increase in cost of goods sold of $62,343 in
2005 is primarily related to an increase in disposable costs due to an increase
in the number of surgical procedures performed which required higher priced
disposable items, and to higher depreciation and amortization costs due to
equipment purchases in recent quarters. The cost of disposables used for certain
surgical procedures are higher in terms of absolute dollars than those used
other surgical procedures. The total disposable costs related to surgical
procedures will vary depending on the mix of procedures performed. The increase
in disposable costs was offset by a slight decrease in overall other cost of
sales items as a result of our cost control efforts.
Gross margin was $953,575 in 2005 or 33% of revenues compared to $775,835 in
2004 or 29% of revenues. Gross margins will vary period-to-period depending upon
a number of factors including mix of services, pricing, cost of disposables
consumed in rendering our services, and contractual agreements. The improvement
in gross margin during 2005 is generally related to the mix of services provided
by the Company, price increases implemented in late 2004 and early 2005, and to
cost control efforts. These factors, among others, resulted in the increase of
approximately 4% in our gross margin rate in 2005 compared to 2004.
11
Selling, general, and administrative expenses were $799,134 or 27% of revenues
in 2005 compared to $799,974 or 30% of revenues in 2004. Such costs include
payroll and related expenses, insurance and rents. Overall selling, general, and
administrative expenses in 2005 were consistent with 2004 as a result of our
on-going cost control efforts.
Other income (expense) was $(19,001) in 2005 compared to $(28,682) in 2004. The
net decrease in other expense of $9,681 is primarily related to a net increase
in gain on disposal of property and equipment of $12,919 offset by an increase
in interest expense of $3,738 in 2005 compared to 2004.
The minority interest in income of limited liability companies of $30,162 in
2005 and $29,729 in 2004 relates to the consolidation of two entities in which
we hold equity investment interests. As of March 31, 2005 and 2004, in
accordance with the Financial Accounting Standards Board Interpretation Nos. 46
and 46R, "Consolidation of Variable Interest Entities" the Company accounted for
its equity investments in these entities under the full consolidation method.
The Company previously utilized the equity method of accounting for such
investments.
Net income was $105,278 in 2005 compared to a net loss of $(82,550) in 2004. No
provision for income taxes is provided for in 2005 and 2004 due to the
availability of net operating loss carryforwards.
Liquidity and Capital Resources
At March 31, 2005 we have a bank line of credit (the "Bank Line of Credit") and
a term loan (the "Term Loan") outstanding in the amount of $650,000 and
$149,775, respectively. The loan agreements, as amended, for both the Bank Line
of Credit and Term Loan provide for monthly interest payments at the prime rate,
plus 2.5%. The Bank Line of Credit, as amended, is not available for additional
borrowings. In addition, the principal balance and accrued interest for both
credit facilities are due and payable on May 31, 2005. The Bank Line of Credit
and Term Loan are collateralized by accounts receivable and a security interest
in other unencumbered assets of the Company.
The Bank Term Loan and Bank Line of Credit agreements prohibit the payment of
cash dividends and require us to maintain certain levels of net worth and to
generate certain ratios of cash flows to debt service. Notwithstanding the
modified terms and conditions of these credit facilities as discussed herein, as
of March 31, 2005 we were not in compliance with certain covenants and
provisions of the original loan agreements, however, the lender has provided
waivers for such non-compliance up to and including the maturity date of May 31,
2005. Both the Bank Term Loan and Bank Line of Credit are classified as current
liabilities in the accompanying condensed consolidated balance sheet as of March
31, 2005.
In 2002 we renegotiated substantially all of our outstanding debt and lease
obligations with our key creditors. The restructured debt and lease agreements
provided for, in some cases, the return of equipment used to collateralize such
obligations, and certain periodic and monthly installment payments for the
balance of such obligations. As of March 31, 2005 our outstanding restructured
debt and lease obligations amounted to $570,000. In the event of default by the
Company all amounts then outstanding are accelerated and become immediately due
and payable. In addition, in the event of default, certain restructured debt and
lease agreements provide for the payment of additional principal amounts of up
to $187,500, excluding collection costs. As of March 31 and the filing of this
Quarterly Report on Form 10-QSB we were in compliance with the terms and
conditions of our renegotiated debt and lease agreements.
The Company had cash and cash equivalents of $493,810 at March 31, 2005. Cash
provided by operating activities for the three months ended March 31, 2005 was
$400,383. Cash from operations includes net income of $105,278, depreciation and
amortization of $299,854, minority interest in net income of $30,162, decreases
in accounts receivable, inventory, prepaid expenses, and deposits and other
assets of $148,683 and an increase in accounts payable of $132,400. Cash used in
investing activities was $88,617 due to the purchase of property and equipment
of $57,865 and cash payments of $42,291 to limited liability companies offset by
net proceeds of $11,539 from the sale of property and equipment. Cash used for
financing activities was $169,551 resulting from payments on lease and debt
obligations of $73,371 and $96,180, respectively.
12
The Company had cash and cash equivalents of $621,042 at March 31, 2004. Cash
provided by operating activities for the three months ended March 31, 2004 was
$319,965. Cash from operations includes depreciation and amortization of
$296,874, a decrease in accounts receivable of $84,775 and an increase in
accounts payable of $78,719 offset by a decrease in accrued expenses of
$134,059. Cash used in investing activities was $228,100 due to the purchase of
property and equipment of $192,281, and cash paid to limited liability companies
of $37,300, offset by proceeds from the sale of property and equipment of
$1,481. Cash used for financing activities was $161,154 resulting from payments
on lease and debt obligations of $63,510 and $97,644, respectively.
We anticipate that our future liquidity requirements will arise from the need to
finance our accounts receivable and inventories, and from the need to fund our
current debt obligations and capital expenditures. The primary sources of
funding for such requirements will be cash generated from operations, raising
additional capital from the sale of equity or other securities, borrowings under
debt facilities and trade payables. The Company believes that it can generate
sufficient cash flow from these sources to fund its operations for at least the
next twelve months.
Item 3. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-15(e). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. The Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective at the reasonable
assurance level at the end of our most recent quarter. There have been no
changes in the Company's disclosure controls and procedures or in other factors
that could affect the disclosure controls subsequent to the date the Company
completed its evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Byong Y. Kwon, Plaintiff against Daniel J. Yun, Emergent Group, Inc., Emergent
Capital Investment Management, LLC, Metedeconk Holdings, LLC, Voyager Advisors,
LLC, Millennium Tradition Limited (f/k/a Millennium Heritage, Limited), Emergent
Management Company, LLC, Endurance Advisors, Limited, SK Networks Co., Ltd.
(f/k/a SK Global Co., Ltd.), Hye Min Kang, John Does 1-2 and Richard Roes 1-2
(collectively the "Defendants").
The civil lawsuit, which was signed by the clerk on February 2, 2005, is brought
in the United States District Court, Southern District of New York. This is an
action by Plaintiff against the Company, a former director, Daniel Yun, and
other parties to recover money damages for alleged fraud, negligent
misrepresentations and aiding and abetting fraud. The 35-page Amended Complaint
alleges that the factual basis involving the action against the Company involves
alleged false representations to Plaintiff to induce him to leave his then
employment during 2001 and accept the Company's and another named Defendant's
alleged offer of employment. Plaintiff seeks compensatory damages and punitive
damages each in the amount of not less than $2,100,000 together with interest
thereon, reasonable attorneys' fees and other specific relief against Defendants
other than the Company. Management intends to deny the Plaintiff's allegations
against the Company and to vigorously defend this lawsuit.
Item 2. Changes in Securities
(a) In the first quarter ended March 31, 2005 there were no sales of
unregistered securities.
(b) Rule 463 of the Securities Act is not applicable to the Company.
(c) In the first quarter ended March 31, 2005 there were no repurchases by the
Company of its Common Stock.
13
Item 3. Defaults Upon Senior Securities
Management's Discussion and Analysis and Results of Financial Condition and the
Notes to Condensed Consolidated Financial Statements in Note 3, describes
certain debt obligations of the Company in which it was not in compliance with
certain covenants for which the lender provided waivers of such non-compliance.
Otherwise, the Company is not in material default under any loan agreements and
is not in material default of the payment of principal or interest that has not
been cured within 30 days.
Item 4. Submissions of Matters to a Vote of Security Holders
In the first quarter ended March 31, 2005 there were no matters submitted to a
vote of security holders.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Except for the exhibits listed below, all of which are filed herewith,
other required exhibits have been previously filed with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
Number Exhibit Description
- -----------------------------
11.1 Statement re: computation of earnings per share. See consolidated
statement of operations and notes thereto.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EMERGENT GROUP INC.
Date: May 13, 2005 By: /s/ Bruce J. Haber
------------------
Bruce J. Haber,
Chairman and Chief Executive Officer
Date: May 13, 2005 By: /s/ William M. McKay
--------------------
William M. McKay,
Chief Financial Officer
15